OCTOBER 2016 FXMOnThly · Indeed in both Brazil and Russia recovery has been un-derway for some...

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Securitized currency solutions: a boon for asset managers and family offices

QCAM Insight ++ The macro perspective ++ FX market talkEconomic activity ++ Inflation ++ FX markets ++ Financial marketsNumber of the month

OCTOBER 2016

FX MOnThly

QCAM Insight

Wellershoff & Partners Ltd. is a strategic research partner of QCAM Currency Asset Management AG. This includes the regular exchange on fundamental developments in the global economy and on financial markets as well as their influence on currency markets. What is more, Wellershoff & Partners Ltd. is available to QCAM Currency Asset Management AG for selected events as well as client meetings.

ImprintContent, concept, and layout:QCAM Currency Asset Management AG, Pfäffikon, and Wellershoff & Partners Ltd., Zürich Editorial deadline: October 17, 2016FX Monthly is published monthly in English and German.

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QCAM Insight Page 1

The macro perspective

FX market talk Page 5

Economic activity Page 7

Inflation Page 11

FX markets Page 15

Financial markets Page 19

Number of the month Page 21

FX Monthly October 2016

Contents

1 | FX Monthly

QCAM Insight

Imagine being an asset manager managing money for your clients on a discretionary basis whilst having mul-tiple client relationships that are held with several dif-ferent custodian banks. An operationally easy way to implement currency hedges in this context is through securitized currency solutions.

High demand for hedged portfoliosWith heightened volatility on currency markets, investors

are increasingly asking for hedged portfolios. A portfolio

manager needs an easy, transparent and efficient solution

for these tasks when handling a large number of client

portfolios that sit not just with one custodian bank but

with many.

Securitized currency solutionsWhat are securitized currency solutions? In essence, from

a transaction point of view, imagine a conventional FX OTC

trade such as a forward or an option where the trade is

not settled via the OTC route, but analog a bond trade

bearing a security number (ISIn, Valoren) which means

the trade gets matched in Euroclear or any similar clear-

ing system. Thanks to this feature, settlement amongst

several custodian banks and many individual client port-

folios is easy and efficient for a portfolio manager. The

credit risk for the client is always the issuing bank.

What does a framework look like for such solutions?To be able to execute these securitized hedges the port-

folio manager first has to do some groundwork. A first

step is to set up a panel of issuer banks that can be

accessed for these tailored products. That can be done by

the asset manager dealing directly with each issuing bank

or by using a specialized structuring firm with this infra-

structure already in place. The advantages of the latter

option for portfolio managers are that it needs less time

to get operational, and that the structuring firm serves as

the single point of contact for the asset manager. The

graph below illustrates such a framework.

One bulk trade, increased transparencylet us look at how such an FX hedge would be implement-

ed via a securitized currency solution. Assume the base

currency of the clients is ChF and they need to be fully

hedged versus USD risk based on the portfolio’s estab-

lished hedging guidelines. Instead of calling every custo-

dian bank and transacting an FX forward hedge individu-

ally with each bank for each client separately, the

portfolio manager who opts for a securitized FX forward

simply asks his panel of issuer banks for the price of that

tailor-made product.

This not only encourages competitive quotes amongst

the issuers and increased transparency, but also makes

for a smoother execution process. Once the portfolio man-

ager has selected the preferred issuer based on his

requirements (for example, for price, rating or quality of

service) he will trade the securitized forward, which will

be issued as an ISIn-bearing security. As the product can

be set up with small denominations, a split to a large num-

ber of client portfolios across various custodian banks is

no headache at all. The portfolio manager sends the term

Securitized currency solutions: a boon for asset managers and family offices

FX Monthly | 2

sheet with the product details to all custodian banks and

instructs them to buy the specified quantity from the

issuer, implemented via delivery versus payment.

Family offices benefitFamily offices can also profit from securitized currency

solutions since they often have only one trading relation-

ship for their currency needs, usually with their main

custodian bank. To increase price transparency and

competitiveness and to decrease reliance on only one

liquidity provider, it is probably a good idea for a family

office to have more than one price-provider.

There are several ways how to achieve this. Either an

investor can initiate several new banking relationships,

each with its attendant complexities of having to sign new

documentation (ISDAs, etc.) and to post collateral with

Source: QCAM Currency Asset Management

each of the banks; or take the route of using securitized

currency solutions, which are individually constructed

based on the specific needs of the investor.

Independent FX advisors satisfy both investor require-

ments for securitized currency solutions: proven, high-

level FX advisory expertise and a robust issuer network

that is already in place.

What the framework looks like

3 | FX Monthly

Despite years of expansionary monetary policy the glob-al economy continues to stagnate. That the improving sentiment in the most important emerging markets au-gur faster global growth is highly doubtful, given the only modest recovery seen in Brazil and Russia and the declining trend growth rates in China.

Autumnal gloomThe mood at the International Monetary Fund and the

World Bank annual meetings in early October was far from

upbeat, and no wonder. Despite all the extraordinary stim-

ulative measures of the world’s central banks, the global

economy continues to sputter. And any new thinking on

how to meet the growth challenge is conspicuous only by

its absence. Instead the familiar remedies were restated:

more fiscal stimulus and structural reform. In this autum-

nal gloom the recent signs of recovery in the emerging

markets are a welcome development.

Recessions abating in Brazil and Russia Indeed in both Brazil and Russia recovery has been un-

derway for some months now. Granted it will still take

several more quarters before either country again con-

tributes positively to global economic growth. The Brazili-

an economy in particular slid deeply into recession through

a combination of economic and political crises in 2014.

For several months now sentiment indicators in Brazil

have anticipated the imminent end of the long recession.

The rising crude oil price and a calmer political scene have

reinforced this improved outlook. Sentiment indicators

are also upbeat in Russia. As in Brazil, the brighter out-

look for Russia also reflects the rising crude oil prices in

the first half of this year, which in turn brought stability

to the ruble.

Another RBI rate cut Among the BRICS, India witnessed the least economic

turbulence in 2016. The central bank, the Reserve Bank

of India, has been the source of some concern in recent

months. Besides a surprise change in leadership this year,

the RBI also introduced new decision-making processes

for its monetary policy. The interest rate cut made at the

first meeting of the newly formed Monetary Policy Com-

mittee may have been a surprise but the ongoing decline

in inflation is a persuasive argument in its favour. Septem-

ber’s consumer price inflation at 4.3 percent is the lowest

rate in over a year. Given the RBI’s 5 percent inflation tar-

get ample room remains for more rate cuts ahead.

Chinese real estate boom lifts the economyChina is the most important developing country for the

global economy. In the first half of the year, besides the

decline in its trend growth rate – ongoing for years now

– some other flagging economic indicators added to

China’s economic gloom. At least for the present, we can

report, the intermittent fears of a cyclical downturn in

China have evaporated. A sharp rise in property prices in

particular has helped to calm the situation. In addition to

the price turnaround, we see a marked increase in steel

and cement consumption, reliable indicators of activity in

Recovering emerging markets cannot kick-start the global economy

The macro perspective

FX Monthly | 4

the construction sector. For the third quarter of the year

Wellershoff & Partners’ proprietary W&P GDP Growth Stat for China sees growth accelerating from 5.9 to 6.2 percent

year-over-year.

Fragile sources of growth in ChinaIn our view, neither the real estate boom nor the rise in

the GDP growth rate can be traced to any inherent new

strength in China’s economy. Instead, once more, the

authorities have intervened decisively, arresting and

reversing the slippage in property and GDP growth. The

real estate boom came with a substantial expansion of

credit, we note. All told, China’s public, corporate and

private sector debt now totals more than two-and-a-half

times its annual GDP. In contrast to many industrialized

countries, the bulk of this debt is in the corporate sector.

Bottom lineBrazil and Russia are recovering. India looks set to grow

at least at its current levels. But if emerging economies

really are to drive growth in the industrialized countries,

China has to contribute more. While the Chinese author-

ities have the resources to stabilise the economy, they are

unable to reverse the stubbornly declining trend growth

rate. The search for ways to accelerate the recovery of

the global economy will therefore have to continue.

Source: Bloomberg, Markit, Wellershoff & Partners

Brazil

China

IndiaRussia

Korea

Brazil

ChinaIndia

Russia

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Cur

rent

leve

l

−6 −5 −4 −3 −2 −1 0 1 2 3 4 5 63−month−change

PMI Manufacturing

PMI Non−Manufacturing

Circle size = nominal GDP

Broad-based sentiment upswing in the emerging markets

5 | FX Monthly

Flash crashes – precipitous price drops and equally abrupt recoveries – are becoming normal on financial markets, including, increasingly, on currency markets. That pattern has caught our attention, especially given the ongoing monetary policy challenges.

Crash, Boom, BangA flash crash is a steep and sudden drop in prices, which

then recover at a similarly rapid pace. Flash crashes have

been with us for years now, and they are occurring with

increasing regularity. Perhaps the best-known early inci-

dent was on May 6, 2010, when the Dow Jones Industri-

al Average Index fell by 9 percent in mere minutes, and

recovered just about as quickly. India’s benchmark stock

market index, the nifty 50, fell by 16 percent in just eight

seconds on October 5, 2012, forcing the market to shut

down for a quarter-hour. And back in the US, on August

24, 2015, the Dow fell around 8 percent in just half an

hour.

Currency market flash crashesThe flash crash phenomenon has recently spread to cur-

rency markets, where so far this year, two such spasms

have been observed. On October 7 the British pound tum-

bled by more than 6 percent versus the US dollar on Asian

markets, making Sterling the second currency this year,

after the South African rand, to experience a flash crash.

A flash crash usually indicates low market liquidity. We

find it noteworthy that the currency markets, which are

broadly considered quite liquid, now increasingly face

flash crashes, especially given the ongoing monetary pol-

icy challenges globally.

Growing importance of high-frequency tradingThe precise cause of a flash crash can be difficult to deter-

mine. Clearly the phenomenon is made possible by tech-

nological innovation. For one thing, the new trading tech-

nologies enable orders to be placed extremely quickly and

to spread rapidly across markets. One obvious assump-

tion is that the increase in flash crashes results from the

growing importance of high-frequency trading. high-

frequency trading employs massive computing power to

execute trades according to pre-set algorithms. As a rule

it is characterised by short deadlines and high sales vol-

umes. Securities are sold within seconds. According to

various sources, around half of the volume traded today

derives from high-frequency trading.

High-frequency scapegoatGiven the disorder caused by flash crashes, it is under-

standable that high-frequency trading is vilified. That sen-

timent is evident in the voices, particularly in Europe, call-

ing for its tighter regulation. But things are really not quite

that simple. The view is widely held that around 80 per-

cent of registered high-frequency traders are so-called

market makers. They provide the market with the liquid-

ity it needs to accommodate buyers and sellers wishing

to trade at different times and in different amounts.

In addition, high-frequency traders often pursue arbi-

trage strategies that exploit small price differences that

Prepare for currency market flash crashes

FX market talk

FX Monthly | 6

may exist between identical investments on different

exchanges. This behaviour is also generally considered

useful. The situation becomes less clear when high-

frequency traders pursue directional strategies based on

privileged information they might receive from relevant

exchanges, or when they use their technical advantages

to distort market prices.

Preparation is vitalhigh-frequency trading is a reality that will not be disap-

pearing anytime soon. Clearly this is also true for curren-

cy markets. We think it pays to prepare for these new con-

ditions. There are some reasonable ways to do this. Our

first piece of advice would be that investors should spread

their unhedged currency risks as widely as possible. Stop-

loss contracts – long a popular method of distributing risk

– can actually be a liability in the era of high-frequency

trading. Introducing limits to stop-loss orders appears to

be a reasonable response. But this approach in turn bears

the risk that a stop-loss order will not be executed

precisely when a falling price reflects more than a short-

term excess but rather a fundamental development.

Source: Thomson Reuters Datastream, Wellershoff & Partners

1.00

1.20

1.40

1.60

1.80

2.00

2.20

1985 1990 1995 2000 2005 2010 2015

GBPUSDGBPUSD PPPNeutral Territory

Tracking the GBPUSD exchange rate

At the same time, private consumption is again proving

essential for the US economy.

In the UK, second-quarter GDP growth was revised

a notch, from 2.2 to 2.1 percent, year-over-year. Senti-

ment indicators picked up meaningfully. The Purchas-

ing Managers’ Index hit its highest level since June 2014.

Whether this upbeat outlook survives the latest con-

cerns about a “hard Brexit” remains to be seen.

In the US, after August’s sharp retreat from 52.9 to 49.4,

the ISM Manufacturing Index staged a comeback in Sep-

tember, climbing to 51.5 points. The ISM non Manufac-

turing Index was even more buoyant, rising from 51.4

to 57.1 points for the month. Thus the service sector in

the US enjoyed an above-average improvement in sen-

timent. After all, this level has only been surpassed twice

in the past two years.

With 156 000 new jobs created in August, the US

labour market could not match the above-average

levels of June (271 000 new jobs) and July (275 000).

Economic activity

Trend growth1

Real GDP growth2 W&P economic sentiment indicators3

Q4/2015 Q1/2016 Q2/2016 Q3/2016 6/2016 7/2016 8/2016 9/2016

United States 1.7 1.9 1.6 1.3 – 3.2 2.9 1.9 3.0

Eurozone 1.0 2.0 1.7 1.6 – 2.1 2.1 2.0 2.2

Germany 1.4 1.3 1.8 1.7 – 2.6 2.6 2.4 2.7

France 0.7 1.3 1.4 1.3 – 1.5 1.4 1.6 1.7

Italy 0.2 0.9 0.9 0.7 – 1.2 1.3 0.9 1.0

Spain 1.6 3.5 3.4 3.2 – 3.3 3.2 2.8 3.0

United Kingdom 1.8 1.7 1.9 2.1 – 2.9 2.2 2.4 2.5

Switzerland 1.5 0.6 1.1 2.0 – 1.2 1.0 0.5 1.0Japan 0.4 0.8 0.1 0.8 – 1.9 1.9 2.0 2.0

Canada 1.6 0.3 1.2 0.9 – 1.3 1.5 1.0 1.7

Australia 2.4 2.8 3.0 3.3 – 3.4 3.5 3.3 3.2

Brazil 1.4 -5.9 -5.4 -3.8 – -2.1 -0.3 -0.5 -0.5

Russia 0.1 -3.8 -1.2 -0.6 – 1.7 -0.3 1.0 1.0

India 7.7 7.2 7.9 7.1 – 6.5 6.5 6.9 6.9

China 7.4 6.8 6.7 6.7 6.7 7.7 8.9 8.6 8.6

Advanced economies4 1.4 2.0 1.5 1.6 – 2.8 2.5 2.0 2.7

Emerging economies4 6.0 4.5 4.8 4.8 – 4.7 5.5 5.5 5.5

World economy4 3.5 3.2 3.2 3.2 – 3.3 3.6 3.3 3.7

1 Current year-on-year trend growth rate of real GDP, in percent, according to the proprietary trend growth model of Wellershoff & Partners.2 Year-on-year growth rate, in percent.3 Wellershoff & Partners economic sentiment indicators are based on consumer and business surveys and have up to 6 months lead on the year-on-year growth rate of real GDP.4 Calculations are based on nominal GDP weights derived from purchasing power parity exchange rates.

Source: European Commission, Penn World Table, Thomson Reuters Datastream, Wellershoff & Partners

Growth overview

7 | FX Monthly


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Brazil Russia India China

Economic growth in emerging economies

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USA Eurozone UK Switzerland Japan

Economic growth in advanced economies

FX Monthly | 8

Global GDP share1 Current account2 Public debt2 Budget deficit2 Unemployment rate3

Ø 5 years Current Ø 5 years Current Ø 5 years Current Ø 5 years Current Ø 5 years Current

United States 22.4 24.7 -2.6 -2.5 111.3 114.2 -7.0 -4.3 7.2 5.0

Eurozone 17.2 15.9 2.6 3.8 105.1 109.6 -3.1 -1.8 11.2 10.1

Germany 4.9 4.6 7.2 9.2 82.4 75.2 0.0 0.3 6.8 6.1

France 3.6 3.3 -0.8 -0.7 112.6 121.6 -4.3 -3.4 9.6 9.6

Italy 2.8 2.5 0.3 2.1 144.5 160.3 -3.0 -2.3 11.1 11.5

Spain 1.8 1.7 0.1 1.1 101.6 117.4 -7.6 -3.7 23.8 19.6

United Kingdom 3.7 3.5 -3.9 -5.9 110.9 115.3 -6.4 -3.8 6.8 4.9

Switzerland 0.9 0.9 9.9 10.6 45.6 46.2 0.0 -0.4 3.0 3.2Japan 6.8 6.3 1.5 3.4 220.8 233.1 -7.5 -5.1 4.0 3.1

Canada 2.3 2.0 -3.0 -3.7 86.0 92.1 -1.9 -2.5 7.1 7.0

Australia 1.9 1.7 -3.6 -3.5 31.0 40.9 -3.3 -2.9 5.6 5.6

China 12.7 15.1 2.3 2.4 37.4 46.3 -1.0 -3.0 4.1 –

Brazil 3.1 2.4 -3.3 -0.8 64.2 78.3 -4.9 -10.4 7.4 11.8

India 2.6 3.0 -2.6 -1.4 68.8 68.5 -7.5 -6.7 – –

Russia 2.6 1.7 3.5 3.0 13.6 17.1 -0.8 -3.9 5.7 5.2


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Budget deficits in advanced economies

Economic indicators

1 In percent; calculations based on market exchange rates. 2 In percent of nominal GDP. 3 In percent.

Overview

9 | FX Monthly


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Public debt in emerging economies

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Public debt in advanced economies

FX Monthly | 10

anticipates Switzerland’s annual overall inflation rate to

climb to 0.5 percent by spring 2017.

US data shows the overall inflation rate climbed by

0.3 percentage points in August to 1.1 percent year-

over-year. With the base effect of low crude oil prices

felt even more strongly there than in Switzerland, Wel-

lershoff & Partners expects annual overall US inflation

to rise by 1 percentage point by spring 2017.

In the industrialized economies a 0.2 percentage point

rise in inflation was posted in September. In the Euro-

zone, overall inflation rose similarly, broadly across all

member countries. Germany was among the leaders of

the pack with an annual inflation rate of 0.6 percent.

In Switzerland, inflation contracted by 0.2 percent

in September compared to a year earlier. In January this

rate was -1.2 percent. We think a further increase in in-

flation is probable in the coming months in Switzerland.

The reasons: the base effects of low energy prices and

the Swiss franc’s appreciation. Wellershoff & Partners

Inflation

Ø 10 years1 Inflation2 Core inflation3

6/2016 7/2016 8/2016 9/2016 6/2016 7/2016 8/2016 9/2016

United States 1.8 1.0 0.8 1.1 – 2.3 2.2 2.3 –

Eurozone 1.5 0.1 0.2 0.2 0.4 0.9 0.9 0.8 0.9

Germany 1.4 0.3 0.4 0.4 0.6 1.2 1.3 1.1 1.2

France 1.2 0.2 0.2 0.2 0.4 – – – –

Italy 1.5 -0.4 -0.1 -0.1 0.1 0.5 0.6 0.4 0.5

Spain 1.5 -0.8 -0.6 -0.1 0.3 0.6 0.7 0.9 –

United Kingdom 2.4 0.5 0.6 0.6 1.0 1.4 1.3 1.3 1.5

Switzerland 0.1 -0.4 -0.2 -0.1 -0.2 -0.2 0.0 0.0 -0.1

Japan 0.3 -0.3 -0.5 -0.5 – 0.5 0.3 0.2 –

Canada 1.6 1.5 1.3 1.1 – 2.1 2.1 1.8 –

Australia 2.5 1.0 – – – 1.6 – – –

Brazil 6.1 8.8 8.7 9.0 8.5 7.7 7.3 7.5 –

Russia 9.3 7.5 7.2 6.8 6.4 7.5 7.4 7.0 6.7

India 8.1 5.8 6.1 5.0 – – – – –

China 0.1 0.5 0.2 -0.7 – 1.6 1.8 1.6 –

Advanced economies4 1.5 0.5 0.5 0.6 0.7 1.5 1.5 1.5 1.5

Emerging economies4 5.2 4.0 4.0 3.4 3.4 3.1 3.2 3.0 3.0

World economy4 3.1 2.2 2.1 1.9 2.0 1.9 1.9 1.9 1.9

1 Average annual consumer price inflation, in percent.2 Year-on-year change of the consumer price index (CPI), in percent.3 Core inflation is a measure of inflation that excludes certain items that can experience volatile price movements, such as energy and certain food items; year-on-year change of the core consumer price index, in percent.4 Calculations are based on nominal GDP weights derived from purchasing power parity exchange rates.


Inflation overview

11 | FX Monthly


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Consumer price inflation in emerging economies

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Consumer price inflation in advanced economies

FX Monthly | 12

Source: Bloomberg, Thomson Reuters Datastream, Wellershoff & Partners

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EURUSD USDJPY GBPUSD EURCHF USDCHF

Interest rate differentials

Interest rates

Current exchange

rate

Interest rate differentials 3 months1 Interest rate differentials 12 months1

Current 1 year ago Ø 5 years Ø 10 years Current 1 year ago Ø 5 years Ø 10 years

EURUSD 1.101 1.17 0.37 0.21 -0.09 1.63 0.71 0.36 -0.03

USDJPY 104.0 -0.89 -0.23 -0.26 -0.92 -1.48 -0.59 -0.51 -1.08

GBPUSD 1.219 0.48 -0.26 -0.24 -0.58 0.80 -0.20 -0.25 -0.61

EURCHF 1.091 -0.44 -0.67 -0.42 -0.85 -0.44 -0.67 -0.53 -0.93

USDCHF 0.990 -1.61 -1.04 -0.63 -0.75 -2.07 -1.38 -0.89 -0.90

GBPCHF 1.207 -1.13 -1.30 -0.86 -1.33 -1.27 -1.58 -1.15 -1.51

CHFJPY 105.1 0.72 0.81 0.37 -0.17 0.59 0.79 0.38 -0.18

AUDUSD 0.757 -0.59 -1.60 -2.20 -2.60 0.16 -0.90 -1.56 -2.17USDCAD 1.327 0.02 0.48 0.77 0.45 -0.46 0.06 0.52 0.26

USDSEK 8.833 -1.50 -0.67 0.30 0.34 -1.85 -0.93 0.13 0.27

USDRUB 63.0 8.92 11.36 8.98 7.47 8.31 11.23 8.52 7.71

USDBRL 3.195 12.73 14.09 10.53 9.84 10.70 14.64 10.26 9.74

USDCNY 6.714 1.92 2.87 3.79 2.43 1.44 2.59 3.46 2.19

USDTRY 3.094 7.94 11.16 8.93 9.65 7.64 10.70 8.75 9.89

USDINR 66.56 7.47 7.47 8.79 7.14 5.41 6.32 6.38 4.57

1 The gap in interest rates between the second currency and the first one, in percentage points; e.g. US dollar minus euro for EURUSD.

Interest rate differentials overview

13 | FX Monthly


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10-year government bond yields

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3-month Libor

FX Monthly | 14

FX markets

Current exchange

rate

Performance1 Purchasing Power Parity2

YTD 3 months 1 year 5 years PPP Neutral territory Deviation3

EURUSD 1.101 1.4 -0.8 -3.2 -19.6 1.30 1.15 - 1.45 -15.2

USDJPY 104.0 -13.5 -1.3 -13.2 35.4 91.0 60.6 - 121.4 14.3

GBPUSD 1.219 -17.3 -8.5 -19.9 -22.5 1.62 1.43 - 1.82 -24.9

EURCHF 1.091 0.3 0.0 -0.1 -11.7 1.23 1.11 - 1.35 -11.3

USDCHF 0.990 -1.1 0.8 3.2 9.8 0.97 0.73 - 1.20 2.3

GBPCHF 1.207 -18.2 -7.8 -17.4 -14.9 1.56 1.28 - 1.84 -22.6

CHFJPY 105.1 -12.6 -2.1 -15.9 23.3 88.8 73.7 - 103.8 18.3

AUDUSD 0.757 4.1 -0.8 3.7 -25.2 0.71 0.60 - 0.82 6.5

USDCAD 1.327 -4.4 2.7 2.3 29.3 1.20 1.13 - 1.27 10.4

USDSEK 8.833 4.8 4.1 8.6 32.1 7.19 6.27 - 8.12 22.8

USDRUB 63.0 -13.7 0.0 0.7 101.6 40.4 32.6 - 48.2 55.8

USDBRL 3.195 -19.2 -1.1 -16.6 81.9 2.86 2.35 - 3.37 11.7

USDCNY 6.714 3.4 0.4 5.8 5.2 6.68 6.45 - 6.92 0.5

USDTRY 3.094 6.0 7.4 4.9 68.2 2.56 2.36 - 2.76 20.7

USDINR 66.56 0.6 -0.5 2.1 35.5 73.4 69.8 - 77.0 -9.3

1 Performance over the respective period of time, in percent.2 Purchasing power parity (PPP) is estimated based on the relative development of inflation rates in two currency markets; the neutral territory is determined by +/- 1 standard deviation of the historical variation around the PPP value.3 Deviation of the current spot rate from PPP, in percent.


Meanwhile, Brazil’s real has gained almost 20 percent

versus the US dollar this year. That would put it at the

top of a hypothetical appreciation table. Its departure

from purchasing power parity has been reversed and

the currency has returned to its historical deviation

levels.

The Russian ruble is another story when it comes to

purchasing power parity deviations. It’s been on a

dizzying run, appreciating some 14 percent versus the

US dollar. nevertheless, on a purchasing power parity

basis we still see a mispricing of over 55 percent versus

the US dollar.

In the early morning hours of October 7 in Europe, the

GBPUSD exchange rate became the latest victim of a

financial market flash crash. Month-over-month versus

G-10 currencies, the pound lost an average of 5.5 per-

cent. Since the Brexit vote on June 23, that loss amounts

to some 15 percent for the pound. Versus the Swiss

franc, the pound’s mispricing on a purchasing power

parity basis has grown to more than 22 percent. This

suggests significant recovery potential for the pound.

however, the discussions about a “hard Brexit” and

Scotland’s latest independence moves are likely to

burden the pound for some time to come.

FX overview

15 | FX Monthly


10

20

30

40

50

60

70

2000 2002 2004 2006 2008 2010 2012 2014 2016

USDRUB

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2000 2002 2004 2006 2008 2010 2012 2014 2016

USDBRL

5.506.006.507.007.508.008.509.00

2000 2002 2004 2006 2008 2010 2012 2014 2016

USDCNY

3540455055606570

2000 2002 2004 2006 2008 2010 2012 2014 2016

USDINR

1.00

1.20

1.40

1.60

1.80

2.00

2.20

1985 1990 1995 2000 2005 2010 2015

GBPUSD

0.20

0.40

0.60

0.80

1.00

1.20

1985 1990 1995 2000 2005 2010 2015

AUDUSD

1.00

1.20

1.40

1.60

1.80

2.00

2.20

1985 1990 1995 2000 2005 2010 2015

EURCHF

0.50

1.00

1.50

2.00

2.50

3.00

1985 1990 1995 2000 2005 2010 2015

USDCHF

0.60

0.80

1.00

1.20

1.40

1.60

1985 1990 1995 2000 2005 2010 2015

SpotPPPNeutral territory

EURUSD

50

100

150

200

250

300

1985 1990 1995 2000 2005 2010 2015

USDJPY

FX Monthly | 16

FX volatility

Source: Bloomberg, Thomson Reuters Datastream, QCAM Currency Asset Management, Wellershoff & Partners

0

5

10

15

20

25

30

1−m

onth

his

toric

al v

olat

ility

in p

erce

nt

2004 2006 2008 2010 2012 2014 2016

QCAM volatility indicator3

Current exchange

rate

Volatility 3 months1 Volatility 12 months1

Historical Implied Ø 5 years2 Ø 10 years2 Historical Implied Ø 5 years2 Ø 10 years2

EURUSD 1.101 6.5 8.9 9.2 10.4 9.0 9.4 9.7 10.7

USDJPY 104.0 11.1 11.5 9.7 10.8 10.9 11.3 10.4 11.1

GBPUSD 1.219 11.5 12.4 8.3 9.7 12.2 12.2 8.9 10.1

EURCHF 1.091 4.2 5.6 5.6 6.2 5.8 6.9 6.6 6.6

USDCHF 0.990 6.7 8.7 9.7 10.5 8.6 9.6 10.3 10.8

GBPCHF 1.207 11.1 12.1 8.8 10.0 12.5 12.0 9.4 10.4

CHFJPY 105.1 10.4 11.2 10.9 11.5 11.0 12.0 11.6 11.9

AUDUSD 0.757 9.4 10.5 10.7 12.4 11.8 11.3 11.4 12.7USDCAD 1.327 8.4 9.3 8.1 9.8 9.6 9.4 8.6 10.1

USDSEK 8.833 8.5 9.9 10.9 12.5 10.3 10.5 11.4 12.7

USDRUB 63.0 12.5 14.4 16.1 13.5 19.3 16.0 16.4 14.6

USDBRL 3.195 14.0 16.8 14.9 15.3 17.7 17.1 15.4 15.7

USDCNY 6.714 2.1 5.0 2.9 2.9 2.6 6.5 3.8 4.5

USDTRY 3.094 11.6 11.7 11.6 13.2 11.5 13.4 13.0 14.6

USDINR 66.56 3.2 5.9 9.3 9.5 4.2 7.5 10.3 10.4

3 The QCAM volatility indicator measures general volatility in global FX markets; the indicator is based on historical volatility of the main exchange rates, which are weighted by trading volume.

1 Annualized volatility, in percent. 2 Average of implied volatility.

FX volatility overview

17 | FX Monthly


0

10

20

30

40

50

60

3−m

onth

impl

icit

vola

tility

in p

erce

nt

2002 2004 2006 2008 2010 2012 2014 2016

USDRUB USDBRL USDCNY USDTRY USDINR

Implied volatility

0

5

10

15

20

25

30

3−m

onth

impl

icit

vola

tility

in p

erce

nt

2002 2004 2006 2008 2010 2012 2014 2016

EURUSD USDJPY GBPUSD EURCHF USDCHF

Implied volatility

FX Monthly | 18


0

50

100

150

200

250

300

inde

x (J

anua

ry 2

002

= 10

0)

2002 2004 2006 2008 2010 2012 2014 2016

Money market Government bonds Stocks Real estate

Performance of selected Swiss asset classes

Financial markets

Performance in either local curreny or USD1 Performance in CHF1

YTD 3 months 1 year 5 years YTD 3 months 1 year 5 years

Swiss money market -0.6 -0.2 -0.7 -0.8 -0.6 -0.2 -0.7 -0.8

Swiss government bonds 5.2 -1.4 4.9 18.6 5.2 -1.4 4.9 18.6

Swiss corporate bonds 2.9 -0.6 2.7 15.7 2.9 -0.6 2.7 15.7

Swiss equities (SMI) -5.2 -1.2 -3.4 64.7 -5.2 -1.2 -3.4 64.7

Eurozone equities (Stoxx600) -4.4 0.4 -2.2 68.9 -3.6 0.6 -2.4 49.0

UK equities (Ftse100) 16.3 6.6 15.2 54.7 -4.0 -0.4 -4.7 32.7

Japanese equities (Topix) -11.4 3.3 -8.7 98.9 2.9 6.4 8.8 63.2

US equities (S&P 500) 6.5 -0.6 9.1 94.5 6.5 0.3 12.5 114.8Emerging markets equities 16.3 4.9 8.6 11.1 16.3 5.9 11.9 22.7

Global equities (MSCI World) 4.3 0.1 4.8 63.0 4.2 1.1 8.1 80.1

Swiss real estate 5.7 -1.0 8.6 32.4 5.7 -1.0 8.6 32.4

Global real estate 5.1 -6.5 5.8 64.9 5.1 -5.7 9.1 82.2

Commodities 9.0 -1.7 -4.8 -42.2 9.0 -0.8 -1.9 -36.2

Brent oil 45.3 9.5 4.6 -54.6 45.3 10.5 7.8 -49.8

Gold 17.8 -5.8 7.3 -25.1 17.8 -4.9 10.6 -17.3

1 Performance over the respective period of time, in percent.

Performance overview

19 | FX Monthly


0

500

1000

1500

2000

USD

per

troy

oun

ce

0

20

40

60

80

100

120

140

160

USD

per

bar

rel (

Bren

t)

2002 2004 2006 2008 2010 2012 2014 2016

Oil price (lhs) Gold (rhs)

Performance of selected commodity prices

0

50

100

150

200

250

inde

x (J

anua

ry 2

002

= 10

0)

2002 2004 2006 2008 2010 2012 2014 2016


Performance of selected equity markets (in local currency)

FX Monthly | 20

Legal Disclaimer

This report has been prepared and published by QCAM Currency Asset Management AG and Wellershoff & Partners Ltd. The analysis contained herein is based on numerous assumptions. Different assumptions could result in mate-rially different results. Although all information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions indicated are subject to change with-out notice. This document may not be reproduced or circulated without the pri-or authorization of QCAM Currency Asset Management AG or Wellershoff & Partners Ltd. Neither QCAM Currency Asset Management AG nor Wellershoff & Partners Ltd. will be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distribu-tion only under such circumstances as may be permitted by applicable law.

number of the month

The year that England’s King henry VII ordered the

minting of the first pound coins. The British pound has

seen a lot since then, from continental blockades to

world wars. Thus Brexit perhaps can only be regarded

as exceptional from a very short-term historical

perspective.

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